**PROMISSORY
      NOTE**


$1,30,000.00


November
      14, 2006




Smart
      Online, Inc.


2530
      Meridian Parkway 2nd Floor


Durham
      North Carolina 27713


(Hereinafter
      referred to as “Borrower”)




Wachovia
      Bank National Association


Charlotte,
      North Carolina 28202


(Hereinafter
      referred to as “Bank”)




Borrower
      promises to pay to the order of Bank, in lawful money of the United States
      of
      America, at its office indicated above or wherever else Bank may specify, the
      sum of One Million, Three Hundred Thousand and No/100 Dollars ($1,300,000.00)
      such sum as may be advanced and outstanding from time to time, with interest
      on
      the unpaid principal balance at the rate and on the terms provided in this
      Promissory Note (including all renewals, extensions or modifications hereof,
      this “Note”).




**LOAN
      AGREEMENT.**  This Note is subject to the provisions of that certain
      Loan Agreement between Bank and Borrower of even date herewith, as modified
      from
      time to time.




**LINE
      OF CREDIT.**  Borrower may borrow, repay and reborrow, and upon the
      request of Borrower, Bank shall advance and readvance under this Note from
      time
      to time (each an “Advance” and together the “Advances”), so long as the total
      principal balance outstanding under this Note at any one time does not exceed
      the principal amount stated on the face of this Note minus the sum of (i) the
      amount available to be drawn under all letters of credit issued by Bank for
      the
      account of Borrower plus (ii) the amount of unreimbursed drawings under all
      letters of credit issued by Bank for the account of Borrower, subject to the
      limitations described in any loan agreement to which this Note is subject.
      Bank’s obligation to make Advances under this Note shall terminate if a demand
      for payment is made under this Note or if a Default (as defined in the other
      Loan Documents) under any Loan Document occurs or in any event, on August 1,
      2007 unless renewed or extended by Bank in writing upon such terms then
      satisfactory to Bank. As of the date of each proposed Advance. Borrower shall
      be
      deemed to represent that each representation made in the Loan Documents is
      true
      as of such date.




If
      Borrower subscribes to Bank’s cash management services and such services are
      applicable to this line of credit, the terms of such service shall control
      the
      manner in which funds are transferred between the applicable demand deposit
      account and the line of credit for credit or debit to the line of
      credit.




**USE
      OF PROCEEDS.**  Borrower shall use the proceeds of the loan(s)
      evidenced by this Note for the commercial purposes of Borrower, as follows:
      finance general working capital.




**SECURITY.** 
      Borrower has granted Bank a security interest in the collateral described in
      the
      Loan Documents, including, but not limited to, personal property collateral
      described in that certain Security Agreement of even date herewith.




**INTEREST
      RATE.**  Interest shall accrue on the unpaid principal balance of
      this Note from the date hereof at the LIBOR Market Index Rate plus 0.9%, as
      that
      rate may change from day to day in accordance with changes in the LIBOR Market
      Index Rate (“Interest Rate”). “LIBOR Market Index Rate”, for any day, means the
      rate for 1 month U.S. dollar deposits as reported on Telerate page 3750 as
      of
      11:00 a.m., London time, on such day. or if such day is not a London business
      day then the immediately preceding London business day (or if not so reported,
      then as determined by Bank from another recognized source or interbank
      quotation).









**DEFAULT
        RATE.** In
        addition to all other rights contained in this Note, if a default in the
        payment
        of Obligations occurs, all outstanding Obligations, other than Obligations
        under
        any swap agreements (as defined in 11 U.S.C. § 101. as in effect from time to
        time) between Borrower and Bank or its affiliates, shall bear interest at
        the
        Interest Rate plus 3% (“Default Rate”), except if the Note is governed by the
        laws of the State of North Carolina and the original principal amount is
        less
        than or equal to $300,000.00. The Default Rate shall also apply from demand
        until the Obligations or any judgment thereon is paid in full.
  **INTEREST
        AMD FEE(S) COMPUTATION (ACTUAL/360).** Interest and fees, if any, shall be computed on the basis of a 360-day year
        for
        the actual number of days in the applicable period (“Actual/360 Computation”).
        The Actual/360 Computation determines the annual effective interest yield
        by
        taking the stated (nominal) rate for a year’s period and then dividing said rate
        by 360 to determine the daily periodic rate to be applied for each day in
        the
        applicable period. Application of the Actual/360 Computation produces an
        annualized effective rate exceeding the nominal rate.
  **REPAYMENT
        TERMS.** This Note shall be due and payable in consecutive monthly payments of accrued
        interest only, commencing on December 1, 2006, and continuing on the same
        day of
        each month thereafter until fully paid. In any event, this Note shall be
        due and
        payable in full, including all principal and accrued interest, on demand
        or in
        no event later than August 1, 2007.
  **APPLICATION
        OF PAYMENTS.** Monies received by Bank from any source for application toward payment of
        the
        Obligations shall be applied to accrued interest and then to principal. Upon
        the
        occurrence of a default in the payment of the Obligations or a Default (as
        defined in the other Loan Documents) under any other Loan Document, monies
        may
        be applied to the Obligations in any manner or order deemed appropriate by
        Bank.
  If
        any
        payment received by Bank under this Note or other Loan Documents is rescinded,
        avoided or for any reason returned by Bank because of any adverse claim or
        threatened action, the returned payment shall remain payable as an obligation
        of
        all persons liable under this Note or other Loan Documents as though such
        payment had not been made.
  **DEFINITIONS.**  **Loan
        Documents.** The term
“Loan Documents”, as used in this Note and the other Loan Documents, refers to
        all documents executed in connection with or related to the loan evidenced
        by
        this Note and any prior notes which evidence all or any portion of the loan
        evidenced by this Note, and any letters of credit issued pursuant to any
        loan
        agreement to which this Note is subject, any applications for such letters
        of
        credit and any other documents executed in connection therewith or related
        thereto, and may include, without limitation, a commitment letter that survives
        closing, a loan agreement, this Note, guaranty agreements, security agreements,
        security instruments, financing statements, mortgage instruments, any renewals
        or modifications, whenever any of the foregoing are executed, but does not
        include swap agreements (as defined in 11 U.S.C. § 101. as in effect from time
        to time). Obligations. The term
“Obligations”, as used in this Note and the other Loan Documents, refers to any
        and all indebtedness and other obligations under this Note, all other
        obligations under any other Loan Document (s), and all obligations under
        any
        swap agreements (as defined in 11 U.S.C. § 101, as in effect from time to time)
        between Borrower and Bank, or its affiliates, whenever executed. Certain
        Other Terms. All
        terms that are used but not otherwise defined in any of the Loan Documents
        shall
        have the definitions provided in the Uniform Commercial Code.
  **LATE
        CHARGE.** If
        any payments are not timely made, Borrower shall also pay to Bank a late
        charge
        equal to 4% of each payment past due for 15 or more days. This late charge
        shall
        not apply to payments due at maturity or by acceleration hereof, unless such
        late payment is in an amount not greater than the highest periodic payment
        due
        hereunder. Acceptance by Bank of any late payment without an accompanying
        late
        charge shall not be deemed a waiver of Bank’s right to collect such late charge
        or to collect a late charge for any subsequent late payment
        received.
  Page
            2




**ATTORNEYS’
        FEES AND OTHER COLLECTION COSTS.** Borrower
        shall pay all of Bank’s reasonable expenses actually incurred to enforce or
        collect any of the Obligations including, without limitation, reasonable
        arbitration, paralegals’, attorneys’ and experts’ fees and expenses, whether
        incurred without the commencement of a suit, in any trial, arbitration, or
        administrative proceeding, or in any appellate or bankruptcy
        proceeding.
  **USURY.** If at
        any time the effective interest rate under this Note would, but for this
        paragraph, exceed the maximum lawful rate, the effective interest rate under
        this Note shall be the maximum lawful rate, and any amount received by Bank
        in
        excess of such rate shall be applied to principal and then to fess and expenses,
        or, if no such amounts are owing, returned to Borrower.
  **DEMAND
        NOTE.** This is
        a demand Note and all Obligations hereunder shall become immediately due
        and
        payable upon demand. In addition, the Obligations hereunder shall automatically
        become immediately due and payable if Borrower or any guarantor or endorser
        of
        this Note commences or has commenced against it a bankruptcy or insolvency
        proceeding.
  **REMEDIES.** Upon the
        occurrence of a default in the payment of the Obligations or a Default (as
        defined in the other Loan Documents) under any other Loan Document, Bank
        may at
        any time thereafter, take the following actions: Bank Lien. Foreclose its
        security interest or lien against Borrower’s deposit accounts and investment
        property without notice. Cumulative. Exercise any rights and remedies as
        provided under the Note and the other Loan Documents, or as provided by law
        or
        equity.
  **FINANCIAL
        AND OTHER INFORMATION.** Borrower
        shall deliver to Bank such information as Bank may reasonably request from
        time
        to time, including without limitation, financial statements and information
        pertaining to Borrower’s financial condition. Such information shall be true,
        complete, and accurate.
  **WAIVERS
        AND AMENDMENTS.** No
        waivers, amendments or modifications of this Note and other Loan Documents
        shall
        be valid unless in writing and signed by an officer of Bank. No waiver by
        Bank
        of any Default (as defined in the other Loan Documents) shall operate as
        a
        waiver of any other Default or the same Default on a future occasion. Neither
        the failure nor any delay on the part of Bank in exercising any right, power,
        or
        remedy under this Note and other Loan Documents shall operate as a waiver
        thereof, nor shall a single or partial exercise thereof preclude any other
        or
        further exercise thereof or the exercise of any other right, power or
        remedy.
  Except
        to
        the extent otherwise provided by the Loan Documents or prohibited by law,
        each
        Borrower and each other person liable under this Note waives presentment,
        protest, notice of dishonor, notice of intention to accelerate maturity,
        notice
        of acceleration of maturity, notice of sale and all other notices of any
        kind.
        Further, each agrees that Bank may (i) extend, modify or renew this Note
        or make
        a novation of the loan evidenced by this Note, and/or (ii) grant releases,
        compromises or indulgences with respect to any collateral securing this Note,
        or
        with respect to any Borrower or other person liable under this Note or any
        other
        Loan Documents, all without notice to or consent of each Borrower and other
        such
        person, and without affecting the liability of each Borrower and other such
        person; provided, Bank may not extend, modify or renew this Note or make
        a
        novation of the loan evidenced by this Note without the consent of the Borrower,
        or if there is more than one Borrower, without the consent of at least one
        Borrower, and further provided, if there is more than one Borrower, Bank
        may not
        enter into a modification of this Note which increases the burdens of a Borrower
        without the consent of that Borrower.
  Page
            3




**MISCELLANEOUS
          PROVISIONS.** Assignment. This Note and the other Loan Documents shall inure to the benefit
          of
          and be binding upon the parties and their respective heirs, legal
          representatives, successors and assigns. Bank’s interests in and rights under
          this Note and the other Loan Documents are freely assignable, in whole
          or in
          part, by Bank. In addition, nothing in this Note or any of the other Loan
          Documents shall prohibit Bank from pledging or assigning this Note or any
          of the
          other Loan. Documents
          or any interest therein to any Federal Reserve Bank. Borrower shall not
          assign
          its rights and interest hereunder without the prior written consent of
          Bank, and
          any attempt by Borrower to assign without Bank’s prior written consent is null
          and void. Any assignment shall not release Borrower from the Obligations.
          Applicable Law; Conflict Between Documents. This Note and, unless otherwise
          provided in any other Loan Document, the other Loan Documents shall be
          governed
          by and interpreted under the laws of the state nameo in Bank’s address on the
          first page hereof without regard to that state’s conflict of laws principles. If
          the terms of this Note should conflict with the terms of any loan agreement
          or
          any commitment letter that survives closing, the terms of this Note shall
          control. Borrower’s Accounts. Except as prohibited by law, Borrower grants Bank
          a security interest in all of Borrower’s deposit accounts and investment
          property with Bank and any of its affiliates. Swap Agreements. All swap
          agreements (as defined in 11 U.S.C. § 101, as in effect from time to time), if
          any, between Borrower and Bank or its affiliates are independent agreements
          governed by the written provisions of said swap agreements, which will
          remain in
          full force and effect, unaffected by any repayment, prepayment, acceleration,
          reduction, increase or change in the terms of this Note, except as otherwise
          expressly provided in said written swap agreements, and any payoff statement
          from Bank relating to this Note shall not apply to said swap agreements
          except
          as otherwise expressly provided in such payoff statement. Jurisdiction.
          Borrower
          irrevocably agrees to non-exclusive personal jurisdiction in the state
          identified as the Jurisdiction above. Severability. If any provision of
          this
          Note or of the other Loan Documents shall be prohibited or invalid under
          applicable law, such provision shall be ineffective but only to the extent
          of
          such prohibition or invalidity, without invalidating the remainder of such
          provision or the remaining provisions of this Note or other such document.
          Notices. Any notices to Borrower shall be sufficiently given, if in writing
          and
          mailed or delivered to the Borrower’s address shown above or such other address
          as provided hereunder, and to Bank, if in writing and mailed or delivered
          to
          Wachovia Bank, National Association, Mail Code VA7628. P. O. Box 13327,
          Roanoke,
          VA 24040 or Wachovia Bank, National Association, Mail Code VA7628, 10 South
          Jefferson Street, Roanoke, VA 24011 or such other address as Bank may specify
          in
          writing from time to time. Notices to Bank must include the mail code.
          In the
          event that Borrower changes Borrower’s address at any time prior to the date the
          Obligations are paid in full, Borrower agrees to promptly give written
          notice of
          said change of address by registered or certified mail, return receipt
          requested, all charges prepaid. Plural; Captions. All references in the
          Loan
          Documents to Borrower. guarantor, person, document or other nouns of reference
          mean both the singular and plural form, as the case may be and the term
“person”
shall mean any individual, person or entity. The captions contained in
          the Loan
          Documents are inserted for convenience only and shall not affect the meaning
          or
          interpretation of the Loan Documents. Advances. Bank may, in its sole
          discretion, make other advances which shall be deemed to be advances under
          this
          Note, even though the stated principal amount of this Note may be exceeded
          as a
          result thereof. Posting of Payments. All payments received during normal
          banking
          hours after 2:00 p.m. local time at the office of Bank first shown above
          shall
          be deemed received at the opening of the next banking day. Joint and Several
          Obligations. If there is more than one Borrower, each is jointly and severally
          obligated together with all other parties obligated for the Obligations.
          Fees
          and Taxes. Borrower shall promptly pay all documentary, intangible recordation
          and/or similar taxes on this transaction whether assessed at closing or
          arising
          from time to time. LIMITATION ON LIABILITY; WAIVER OF PUNITIVE DAMAGES.
          EACH OF
          THE PARTIES HERETO, INCLUDING BANK BY ACCEPTANCE HEREOF, AGREES THAT IN
          ANY
          JUDICIAL, MEDIATION OR ARBITRATION PROCEEDING OR ANY CLAIM OR CONTROVERSY
          BETWEEN OR AMONG THEM THAT MAY ARISE OUT OF OR BE IN ANY WAY CONNECTED
          WITH THIS
          AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENT OR DOCUMENT BETWEEN
          OR
          AMONG THEM OR THE OBLIGATIONS EVIDENCED HEREBY OR RELATED HERETO, IN NO
          EVENT
          SHALL ANY PARTY HAVE A REMEDY OF, OR BE LIABLE TO THE OTHER FOR, (1) INDIRECT,
          SPECIAL OR CONSEQUENTIAL DAMAGES OR (2) PUNITIVE OR EXEMPLARY DAMAGES.
          EACH OF
          THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY
          DAMAGES THEY MAY HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH
          ANY
          SUCH PROCEEDING, CLAIM OR CONTROVERSY, WHETHER THE SAME IS RESOLVED BY
          ARBITRATION, MEDIATION, JUDICIALLY OR OTHERWISE. Patriot Act Notice. To
          help
          fight the funding of terrorism and money laundering activities. Federal
          law
          requires all financial institutions to obtain, verify, and record information
          that identifies each person who opens an account. For purposes of this
          section,
          account shall be understood to include loan accounts. Final Agreement.
          This Note
          and the other Loan Documents represent the final agreement between the
          parties
          and may not be contradicted by evidence
          of prior, contemporaneous or subsequent oral agreements of the parties.
          There
          are no unwritten oral agreements between the parties.
 
 Page
            4
  **ARBITRATION.**
        Upon demand of any party hereto, whether made before or after institution
        of any
        judicial proceeding, any claim or controversy arising out of or relating
        to the
        Loan Documents between parties hereto (a “Dispute”) shall be resolved by binding
        arbitration conducted under and governed by the Commercial Financial Disputes
        Arbitration Rules (the “Arbitration Rules”) of the American Arbitration
        Association (the “AAA”) and the Federal Arbitration Act. Disputes may include,
        without limitation, tort claims, counterclaims, a dispute as to whether a
        matter
        is subject to arbitration, or claims arising from documents executed in the
        future, but shall specifically exclude claims brought as or converted to
        class
        actions. A judgment upon the award may be entered in any court having
        jurisdiction. Notwithstanding the foregoing, this arbitration provision does
        not
        apply to disputes under or related to swap agreements. Special Rules. All
        arbitration hearings shall be conducted in the city named in the address
        of Bank
        first stated above. A hearing shall begin within 90 days of demand for
        arbitration and all hearings shall conclude within 120 days of demand for
        arbitration. These time limitations may not be extended unless a party shows
        cause for extension and then for no more than a total of 60 days. The expedited
        procedures set forth in Rule 51 et
        seq. of the
        Arbitration Rules shall be applicable to claims of less than $1,000,000.00.
        Arbitrators shall be licensed attorneys selected from the Commercial Financial
        Dispute Arbitration Panel of the AAA. The parties do not waive applicable
        Federal or state substantive law except as provided herein. Preservation
        and
        Limitation of Remedies. Notwithstanding the preceding binding arbitration
        provisions, the parties agree to preserve, without diminution, certain remedies
        that any party may exercise before or after an arbitration proceeding is
        brought. The parties shall have the right to proceed in any court of proper
        jurisdiction or by self-help to exercise or prosecute the following remedies,
        as
        applicable: (i) all rights to foreclose against any real or personal property
        or
        other security by exercising a power of sale or under applicable law by judicial
        foreclosure including a proceeding to confirm the sale; (ii) all rights of
        self-help including peaceful occupation of real property and collection of
        rents, set-off, and peaceful possession of personal property; (iii) obtaining
        provisional or ancillary remedies including injunctive relief, sequestration,
        garnishment, attachment, appointment of receiver and filing an involuntary
        bankruptcy proceeding; and (iv) when applicable, a judgment by confession
        of
        judgment. Any claim or controversy with regard to any party’s entitlement to
        such remedies is a Dispute. Waiver of Jury Trial. THE PARTIES ACKNOWLEDGE
        THAT
        BY AGREEING TO BINDING ARBITRATION THEY HAVE IRREVOCABLY WAIVED ANY RIGHT
        THEY
        MAY HAVE TO JURY TRIAL WITH REGARD TO A DISPUTE AS TO WHICH BINDING ARBITRATION
        HAS BEEN DEMANDED.
  IN
        WITNESS WHEREOF, Borrower, on the day and year first above written, has caused
        this Note to be duly executed under seal.
  Smart
                  Online, Inc.By:
              /s/ Nicholas
                A.
                Sinigaglia                                                 (SEAL)Nicholas
                  A. Sinigaglia, Chief Financial Officer
  Page
              5
  **LOAN
            AGREEMENT**
  Wachovia
            Bank, National Association
 Charlotte,
            North Carolina 28202
 (Hereinafter
            referred to as the “Bank”)
  Smart
            Online, Inc.
 2530
            Meridian Parkway, 2nd Floor
 Durham,
            North Carolina 27713
 (Hereinafter
            referred to as “Borrower”)
  This
            Loan
            Agreement (“Agreement”) is entered into November 14, 2006, by and between Bank
            and Borrower.
  This
            Agreement applies to the loan or loans (individually and collectively,
            the
“Loan”) evidenced by one or more promissory notes dated November 14, 2006 or
            other notes subject hereto, as modified from time to time (whether one
            or more,
            the “Note”) and all Loan Documents. The terms “Loan Documents” and
“Obligations,” as used in this Agreement, are defined in the Note.
  Relying
            upon the covenants, agreements, representations and warranties contained
            in this
            Agreement, Bank is willing to extend credit to Borrower upon the terms
            and
            subject to the conditions set forth herein, and Bank and Borrower agree
            as
            follows:
  **AVAILABILITY.** With
            respect to the line of credit Promissory Note in the amount of $1,300,000.00,
            dated November 14, 2006, notwithstanding anything to the contrary contained
            herein, the aggregate outstanding principal balance of Advances (as defined
            in
            the Note), plus the sum of (i) the aggregate amount available to be drawn
            under
            all letters of credit issued by Bank for the account of Borrower plus
            (ii) the
            aggregate amount of unreimbursed drawings under all letters of credit
            issued by
            Bank for the account of Borrower at any one time shall not exceed
            $1,300,000.00.




**REPRESENTATIONS.** Borrower
          represents that from the date of this Agreement and until final payment
          in full
          of the Obligations: Accurate Information. All information now and hereafter
          furnished to Bank is and will be true, correct and complete in all material
          respects. Any such information relating to Borrower’s financial condition will
          accurately reflect Borrower’s financial condition as of the date(s) thereof,
          (including all contingent liabilities of every type), and Borrower further
          represents that its financial condition has not changed materially or adversely
          since the date(s) of such documents. Authorization; Non-Contravention.
          The
          execution, delivery and performance by Borrower and any guarantor, as
          applicable, of this Agreement and other Loan Documents to which it is a
          party
          are within its power, have been duly authorized as may be required and,
          if
          necessary, by making appropriate filings with any governmental agency or
          unit
          and are the legal, binding, valid and enforceable obligations of Borrower
          and
          any guarantors, and do not (i) contravene, or constitute (with or without
          the
          giving of notice or lapse of time or both) a violation of any provision
          of
          applicable law, a violation of the organizational documents of Borrower
          or any
          guarantor, or a default under any agreement, judgment, injunction, order,
          decree
          or other instrument binding upon or affecting Borrower or any guarantor,
          (ii)
          result in the creation or imposition of any lien (other than the lien(s)
          created
          by the Loan Documents) on any of Borrower’s or any guarantor’s assets, or (iii)
          give cause for the acceleration of any obligations of Borrower or any guarantor
          to any other creditor. Asset Ownership. Borrower has good and marketable
          title
          to all of the properties and assets reflected on the balance sheets and
          financial statements supplied Bank by Borrower, and all such properties
          and
          assets are free and clear of mortgages, security deeds, pledges, liens,
          charges,
          and all other encumbrances, except as otherwise disclosed to Bank by Borrower
          in
          writing and approved by Bank (“Permitted Liens”). To Borrower’s knowledge, no
          default has occurred under any Permitted Liens and no claims or interests
          adverse to Borrower’s present rights in its properties and assets have arisen.
          Discharge of Liens and Taxes. Borrower has duly filed, paid and/or discharged
          all taxes or other claims that may become a lien on any of its property
          or
          assets, except to the extent that such items are being appropriately
          contested in good faith and an adequate reserve for the payment thereof
          is being
          maintained. Sufficiency of Capital. Borrower is not, and after consummation
          of
          this Agreement and after giving effect to all indebtedness incurred and
          liens
          created by Borrower in connection with the Note and any other Loan Documents,
          will not be, insolvent within the meaning of 11 U.S.C. § 101, as in effect from
          time to time. Compliance with Laws. Borrower and any subsidiary and affiliate
          of
          Borrower and any guarantor are in compliance in all material respects with
          all
          federal, state and local laws, rules and regulations applicable to its
          properties, operations, business, and finances, including, without limitation,
          any federal or state laws relating to liquor (including 18 U.S.C. § 3617, et
          seq.) or narcotics (including 21 U.S.C. § 801, et seq.) and/or any commercial
          crimes; all applicable federal, state and local laws and regulations intended
          to
          protect the environment, and the Employee Retirement Income Security Act
          of
          1974, as amended (“ERISA”), if applicable. None of Borrower, or any subsidiary
          or affiliate of Borrower or any guarantor is a Sanctioned Person or has
          any of
          its assets in a Sanctioned Country or does business in or with, or derives
          any
          of its operating income from investments in or transactions with, Sanctioned
          Persons or Sanctioned Countries in violation of economic sanctions administered
          by OFAC. The proceeds from the Loan will not be used to fund any operations
          in,
          finance any investments or activities in, or make any payments to, a Sanctioned
          Person or a Sanctioned Country. “OFAC” means the U.S. Department of the
          Treasury’s Office of Foreign Assets Control. “Sanctioned Country” means a
          country subject to a sanctions program identified on the list maintained
          by OFAC
          and available at http://www.treas.gov/offices/enforcemen/ofac/sanctions/,
          or as
          otherwise published from time to time. “Sanctioned Person” means (i) a person
          named on the list of Specially Designated Nationals or Blocked Persons
          maintained by OFAC available at
          http:/www.treas.gov/offices/enforcement/ofac/sdn/, or as otherwise published
          from time to time, or (ii) (A) an agency of the government of a Sanctioned
          Country, (B) an organization controlled by a Sanctioned Country, or (C)
          a person
          resident in a Sanctioned Country to the extent subject to a sanctions program
          administered by OFAC. Organization and Authority. Each corporation, partnership
          or limited liability company Borrower and/or guarantor, as applicable,
          is duly
          created, validly existing and in good standing under the laws of the state
          of
          its organization, and has all powers, governmental licenses, authorizations,
          consents and approvals required to operate its business as now conducted.
          Each
          corporation, partnership or limited liability company Borrower and/or guarantor,
          as applicable, is duly qualified, licensed and in good standing in each
          jurisdiction where qualification or licensing is required by the nature
          of its
          business or the character and location of its property, business or customers,
          and in which the failure to so qualify or be licensed, as the case may
          be, in
          the aggregate, could have a material adverse effect on the business, financial
          position, results of operations, properties or prospects of Borrower or
          any such
          guarantor. No Litigation. There are no pending or threatened suits, claims
          or
          demands against Borrower or any guarantor that have not been disclosed
          to Bank
          by Borrower in writing, and approved by Bank. Indemnity. Borrower will
          indemnify
          Bank and its affiliates from and against any losses, liabilities, claims,
          damages, penalties or fines imposed upon, asserted or assessed against
          or
          incurred by Bank arising out of the inaccuracy or breach of any of the
          representations contained in this Agreement or any other Loan
          Documents.
  **AFFIRMATIVE
        COVENANTS.** Borrower
        agrees that from the date hereof and until final payment in full of the
        Obligations, unless Bank shall otherwise consent in writing, Borrower will:
        Access to Books and Records. Allow Bank, or its agents, during normal business
        hours, access to the books, records and such other documents of Borrower
        as Bank
        shall reasonably require, and allow Bank, at Borrower’s expense, to inspect,
        audit and examine the same and to make extracts therefrom and to make copies
        thereof. Business Continuity. Conduct its business in substantially the same
        manner and locations as such business is now and has previously been conducted.
        Certificate of Full Compliance From Accountant. Deliver to Bank, with the
        financial statements required herein, a certification by Borrower’s independent
        certified public accountant that Borrower is in full compliance with the
        Loan
        Documents. Compliance with Other Agreements. Comply with all terms and
        conditions contained in this Agreement, and any other Loan Documents, and
        swap
        agreements, if applicable, as defined in 11 U.S.C. § 101, as in effect from time
        to time. Estoppel Certificate. Furnish, within 15 days after request by Bank,
        a
        written statement duly acknowledged of the amount due under the Loan and
        whether
        offsets or defenses exist against the Obligations. Insurance. Maintain adequate
        insurance coverage with respect to its properties and business against loss
        or
        damage of the kinds and in the amounts customarily insured against by companies
        of established reputation engaged in the same or similar businesses including,
        without limitation, commercial general liability insurance, workers compensation
        insurance, and business interruption insurance; all acquired in such amount
        and
        from such companies as Bank may reasonably require. Maintain Properties.
        Maintain, preserve and keep its property in good repair, working order and
        condition, making all replacements, additions and improvements thereto necessary
        for the proper conduct of its business, unless prohibited by the Loan Documents.
        Collateral. Borrower shall at all times maintain as Collateral a Irrevocable
        Standby Letter of Credit acceptable to the Bank naming the Bank as the
        beneficiary.
  Page
                2
  **Notice
              of Default and Other Notices.** (a) **Notice of Default.** Furnish
              to Bank immediately upon becoming aware of the existence of any condition
              or
              event which constitutes a Default (as defined in the Loan Documents)
              or any
              event which, upon the giving of notice or lapse of time or both, may
              become a
              Default, written notice specifying the nature and period of existence
              thereof
              and the action which Borrower is taking or proposes to take with respect
              thereto, (b) **** Other
              Notices. Promptly notify Bank in writing of (i) any material adverse
              change in
              its financial condition or its business; (ii) any default under any
              material
              agreement, contract or other instrument to which it is a party or by
              which any
              of its properties are bound, or any acceleration of the maturity of
              any
              indebtedness owing by Borrower; (iii) any material adverse claim against
              or
              affecting Borrower or any part of its properties; (iv) the commencement
              of, and
              any material determination in, any litigation with any third party
              or any
              proceeding before any governmental agency or unit affecting Borrower,
              (v) at
              least 30 days prior thereto, any change in Borrower’s name or address as shown
              above, and/or any change in Borrower’s structure; and (vi) receipt of a notice
              of non-renewal or final expiration, cancellation, or any other indication
              that
              the Standby Letter of Credit provided as Collateral for the Note will
              not be
              renewed or extended beyond the current stated expiration date. Other
              Financial
              Information. Deliver promptly such other information regarding the
              operation,
              business affairs, and financial condition of Borrower which Bank may
              reasonably
              request. Payment of Debts. Pay and discharge when due, and before subject
              to
              penalty or further charge, and otherwise satisfy before maturity or
              delinquency,
              all obligations, debts, taxes, and liabilities of whatever nature or
              amount,
              except those which Borrower in good faith disputes. Reports and Proxies.
              Deliver
              to Bank, promptly, a copy of all financial statements, reports, notices,
              and
              proxy statements, sent by Borrower to stockholders, and all regular
              or periodic
              reports required to be filed by Borrower with any governmental agency
              or
              authority.
  **NEGATIVE
              COVENANTS.** Borrower
              agrees that from the date hereof and until final payment in full of
              the
              Obligations, unless Bank shall otherwise consent in writing, Borrower
              will not:
              Default on Other Contracts or Obligations. Default on any material
              contract with
              or obligation when due to a third party or default in the performance
              of any
              obligation to a third party incurred for money borrowed. Government
              Intervention. Permit the assertion or making of any seizure, vesting
              or
              intervention by or under authority of any governmental entity, as a
              result of
              which the management of Borrower or any guarantor is displaced of its
              authority
              in the conduct of its respective business or such business is curtailed
              or
              materially impaired. Judgment Entered. Permit the entry of any monetary
              judgment
              or the assessment against, the filing of any tax lien against, or the
              issuance
              of any writ of garnishment or attachment against any property of or
              debts due
              Borrower in an amount in excess of $100,000.00 which is not discharged
              or
              execution is not stayed within 30 days of entry. Retire or Repurchase
              Capital
              Stock. Retire or otherwise acquire any of its capital stock.
  **ANNUAL
              FINANCIAL STATEMENTS.** Borrower
              shall deliver to Bank, within 120 days after the close of each fiscal
              year,
              audited financial statements reflecting its operations during such
              fiscal year,
              including, without limitation, a balance sheet, profit and loss statement
              and
              statement of cash flows, with supporting schedules and in reasonable
              detail,
              prepared in conformity with generally accepted accounting principles,
              applied on
              a basis consistent with that of the preceding year. If audited statements
              are
              required, all such statements shall be examined by an independent certified
              public accountant acceptable to Bank. The opinion of such independent
              certified
              public accountant shall not be acceptable to Bank if qualified due
              to any
              limitations in scope imposed by Borrower or any other person or entity.
              Any
              other qualification of the opinion by the accountant shall render the
              acceptability of the financial statements subject to Bank’s
              approval.
  Page
                        3
  **PERIODIC
                      FINANCIAL STATEMENTS.** Borrower
                      shall deliver to Bank, within 45 days after the end of each
                      fiscal quarter,
                      unaudited management-prepared quarterly financial statements
                      including, without
                      limitation, a balance sheet, profit and loss statement and
                      statement of cash
                      flows, with supporting schedules; all in reasonable detail
                      and prepared in
                      conformity with generally accepted accounting principles, applied
                      on a basis
                      consistent with that of the preceding year. Such statements
                      shall be certified
                      as to their correctness by a principal financial officer of
                      Borrower and in each
                      case, if audited statements are required, subject to audit
                      and year-end
                      adjustments
  **CONDITIONS
                      PRECEDENT.** The
                      obligations of Bank to make the loan and any advances pursuant
                      to this Agreement
                      are subject to the following conditions precedent. Additional
                      Documents. Receipt
                      by Bank of such additional supporting documents as Bank or
                      its counsel may
                      reasonably request.
  **IN
                      WITNESS WHEREOF,** Borrower
                      and Bank, on the day and year first written above, have caused
                      this Agreement to
                      be duly executed under seal.
    Smart
                                Online, Inc.By:
                            /s/ Nicholas
                              A.
                              Sinigaglia                                               
                              (SEAL)Nicholas
                                A. Sinigaglia, Chief Financial Officer




Wachovia
                Bank National AssociationDate:
            By:
            /s/ Kevin
              Harewood                                                        
              (SEAL)Kevin
                Harewood, Vice President




Page
                  4
  **SECURITY
                AGREEMENT**
  November
                14, 2006
  Smart
                Online, Inc.
 2530
                Meridian Parkway, 2nd Floor
 Durham,
                North Carolina 27713
 (Hereinafter
                referred to as “Debtor”)
  Wachovia
                Bank, National Association
 Charlotte,
                North Carolina 28202
 (Hereinafter
                referred to as “Bank”)
  For
                value
                received and to secure payment and performance of any and all obligations
                of
                Debtor (also referred to herein as “Borrower”) to Bank however created, arising
                or evidenced, whether direct or indirect, absolute or contingent,
                now existing
                or hereafter arising or acquired, including swap agreements (as defined
                in 11
                U.S.C. § 101, as in effect from time to time), future advances, and all costs
                and expenses incurred by Bank to obtain, preserve, perfect and enforce
                the
                security interest granted herein and to maintain, preserve and collect
                the
                property subject to the security interest (collectively, “Obligations”), Debtor
                hereby grants to Bank a continuing security interest in and lien
                upon, and for
                security purposes assigns and transfers to Bank until all of the
                Obligations are
                repaid in full, the following described property, whether now owned
                or hereafter
                acquired, and any additions, replacements, accessions, or substitutions
                thereof
                and all cash and non-cash proceeds and products thereof (collectively,
                “Collateral”):
  Debtor’s
                deposit account with Bank and affiliates of Bank, deposit account
                number
                2000033033877 (“Assigned Deposits”).
  Irrevocable
                Standby Letter of Credit #G-007125 in the amount of $1,300,000.00
                issued by HSBC
                Private Bank (Suisse) SA.
  Debtor
                hereby represents and agrees that:
  **OWNERSHIP.** Debtor
                owns the Collateral. The Collateral is free and clear of all liens,
                security
                interests, and claims except those previously reported in writing
                to and
                approved by Bank, and Debtor will keep the Collateral free and clear
                from all
                liens, security interests and claims, other than those granted to
                or approved by
                Bank. Until all of the Obligations are repaid in full, Bank shall
                have the
                entire right and interest in and to the Assigned Deposits. By executing
                this
                Security Agreement, Debtor has divested itself of all control over
                the Assigned
                Deposits and Bank is entitled to and does possess sole dominion and
                control over
                the Assigned Deposits and is entitled to receive the benefits accruing
                with
                respect thereto. Debtor surrenders all authority or right to withdraw,
                collect,
                receive the benefits of, or otherwise assign or encumber the Assigned
                Deposits,
                and authorizes Bank (and each affiliate and branch office of Bank
                or such
                affiliate) to treat Bank as the sole and exclusive owner of the Assigned
                Deposits. Upon the maturity of the Assigned Deposits, other than
                Assigned
                Deposits at Bank that automatically roll over at maturity, Bank shall
                reinvest
                the Assigned Deposits in an investment of Bank’s choice. Bank shall have no
                liability to Debtor for any loss incurred in connection with or arising
                out of
                any such reinvestment except for loss resulting from Bank’s gross negligence or
                willful misconduct. The assignment evidenced by this Security Agreement
                is a
                continuing one and is irrevocable so long as any of the Obligations
                are
                outstanding or the Bank shall have any obligations under the Loan
                Documents and
                shall terminate only upon payment or other satisfaction in full of
                all
                Obligations or Bank’s acknowledgment in writing that this Security Agreement has
                been terminated. Upon termination of this Security Agreement, and
                to the extent
                the Assigned Deposits have not been applied in satisfaction of the
                Obligations,
                Bank shall reassign the Assigned Deposits to Debtor and return any
                passbooks,
                certificates, and other documents in Bank’s possession at Debtor’s
                request.




**NAME
        AND OFFICES; JURISDICTION OF ORGANIZATION.** The name and address of
        Debtor appearing at the beginning of this Agreement are Debtor’s exact legal
        name and the address of its chief executive office. There has been no change
        in
        the name of Debtor, or the name under which Debtor conducts business, within
        the
        five years preceding the date hereof except as previously reported in writing
        to
        Bank. Debtor has not moved its chief executive office within the five years
        preceding the date hereof except as previously reported in writing to Bank.
        Debtor is organized under the laws of the State of Delaware and has not changed
        the jurisdiction of its organization within the five years preceding the
        date
        hereof except as previously reported in writing to Bank.
  **TITLE/TAXES.**
        Debtor has good and marketable title to the Collateral and will warrant and
        defend same against all claims. Debtor will not transfer, sell, or lease
        Collateral (except as permitted herein). Debtor agrees to pay promptly all
        taxes
        and assessments upon or for the use of Collateral and on this Security
        Agreement. At its option, Bank may discharge taxes, liens, security interests
        or
        other encumbrances at any time levied or placed on Collateral. Debtor agrees
        to
        reimburse Bank, on demand, for any such payment made by Bank. Any amounts
        so
        paid shall be added to the Obligations.
  **WAIVERS.**
        Debtor agrees not to assert against Bank as a defense (legal or equitable),
        as a
        set-off, as a counterclaim, or otherwise, any claims Debtor may have against
        any
        seller or lessor that provided personal property or services relating to
        any
        part of the Collateral or against any other party liable to Bank for all
        or any
        part of the Obligations. Debtor waives all exemptions and homestead rights
        with
        regard to the Collateral. Debtor waives any and all rights to any bond or
        security which might be required by applicable law prior to the exercise
        of any
        of Bank’s remedies against any Collateral. All rights of Bank and security
        interests hereunder, and all obligations of Debtor hereunder, shall be absolute
        and unconditional, not discharged or impaired irrespective of (and regardless
        of
        whether Debtor receives any notice of): (i) any lack of validity or
        enforceability of any Loan Document; (ii) any change in the time, manner
        or
        place of payment or performance, or in any term, of all or any of the
        Obligations or the Loan Documents or any other amendment or waiver of or
        any
        consent to any departure from any Loan Document; or (iii) any exchange,
        insufficiency, unenforceability, enforcement, release, impairment or
        non-perfection of any collateral, or any release of or modifications to or
        insufficiency, unenforceability or enforcement of the obligations of any
        guarantor or other obligor. To the extent permitted by law, Debtor hereby
        waives
        any rights under any valuation, stay, appraisement, extension or redemption
        laws
        now existing or which may hereafter exist and which, but for this provision,
        might be applicable to any sale or disposition of the Collateral by Bank;
        and
        any other circumstance which might otherwise constitute a defense available
        to,
        or a discharge of any party with respect to the Obligations.
  **NOTIFICATIONS;
        LOCATION OF COLLATERAL.** Debtor will notify Bank in writing at least 30
        days prior to any change in: (i) Debtor’s chief place of business and/or
        residence; (ii) Debtor’s name or identity; (iii) Debtor’s
        corporate/organizational structure; or (iv) the jurisdiction in which Debtor
        is
        organized. In addition, Debtor shall promptly notify Bank of any claims or
        alleged claims of any other person or entity to the Collateral or the
        institution of any litigation, arbitration, governmental investigation or
        administrative proceedings against or affecting the Collateral. Debtor will
        keep
        Collateral at the location(s) previously provided to Bank until such time
        as
        Bank provides written advance consent to a change of location. Debtor will
        bear
        the cost of preparing and filing any documents necessary to protect Bank’s
        liens.
  **COLLATERAL
        CONDITION AND LAWFUL USE.** Debtor represents that the Collateral is in
        good repair and condition and that Debtor shall use reasonable care to prevent
        Collateral from being damaged or depreciating, normal wear and tear excepted.
        Debtor shall immediately notify Bank of any material loss or damage to
        Collateral. Debtor shall not permit any item of Collateral to become a fixture
        to real estate or an accession to other personal property unless such property
        is also Collateral hereunder. Debtor represents it is in compliance in all
        respects with all laws, rules and regulations applicable to the Collateral
        and
        its properties, operations, business, and finances.
  Page
                      2
  **RISK
                      OF LOSS AND INSURANCE.**  Debtor shall bear all risk of loss with
                      respect to the Collateral. The injury to or loss of Collateral,
                      either partial
                      or total, shall not release Debtor from payment or other performance
                      hereof.
                      Debtor agrees to obtain and keep in force property insurance
                      on the Collateral
                      with a Lender’s Loss Payable Endorsement in favor of Bank and commercial
                      general
                      liability insurance naming
                      Bank as Additional Insured and such other insurance as Bank
                      may require from
                      time to time. Such insurance is to be in form and amounts satisfactory
                      to Bank
                      and issued by reputable insurance carriers satisfactory to
                      Bank with a Best
                      Insurance Report Key Rating of at least “A-”. All such policies shall provide to
                      Bank a minimum of 30 days written notice of cancellation. Debtor
                      shall furnish
                      to Bank such policies, or other evidence of such policies satisfactory
                      to Bank.
                      If Debtor fails to obtain or maintain in force such insurance
                      or fails to
                      furnish such evidence, Bank is authorized, but not obligated,
                      to purchase any or
                      all insurance or “Single Interest Insurance” protecting such interest as Bank
                      deems appropriate against such risks and for such coverage
                      and for such amounts,
                      including either the loan amount or value of the Collateral,
                      all at its
                      discretion, and at Debtor’s expense. In such event, Debtor agrees to reimburse
                      Bank for the cost of such insurance and Bank may add such cost
                      to the
                      Obligations. Debtor shall bear the risk of loss to the extent
                      of any deficiency
                      in the effective insurance coverage with respect to loss of
                      damage to any of the
                      Collateral. Debtor hereby assigns to Bank the proceeds of all
                      property insurance
                      covering the Collateral up to the amount of the Obligations
                      and directs any
                      insurer to make payments directly to Bank. Debtor hereby appoints
                      Bank its
                      attorney-in-fact, which appointment shall be irrevocable and
                      coupled with an
                      interest for so long as Obligations are unpaid, to file proof
                      of loss and/or any
                      other forms required to collect from any insurer any amount
                      due from any damage
                      or destruction of Collateral, to agree to and bind Debtor as
                      to the amount of
                      said recovery, to designate payee(s) of such recovery, to grant
                      releases to
                      insurer, to grant subrogation rights to any insurer, and to
                      endorse any
                      settlement check or draft. Debtor agrees not to exercise any
                      of the foregoing
                      powers granted to Bank without Bank’s prior written consent.
  **FINANCING
                    STATEMENTS, CERTIFICATES OF TITLE, POWER OF ATTORNEY.** No
                    financing statement (other than any filed or approved by Bank)
                    covering any
                    Collateral is on file in any public filing office. Debtor authorizes
                    the filing
                    of one or more financing statements covering the Collateral in
                    form satisfactory
                    to Bank, and without Debtor’s signature where authorized by law, agrees to
                    deliver certificates of title on which Bank’s lien has been indicated covering
                    any Collateral subject to a certificate of title statute, and
                    will pay all costs
                    and expenses of filing or applying for the same or of filing
                    this Security
                    Agreement in all public filing offices, where filing is deemed
                    by Bank to be
                    desirable. Debtor hereby constitutes and appoints Bank the true
                    and lawful
                    attorney of Debtor with full power of substitution to take any
                    and all
                    appropriate action and to execute any and all documents, instruments
                    or
                    applications that may be necessary or desirable to accomplish
                    the purpose and
                    carry out the terms of this Security Agreement, including, without
                    limitation,
                    to ask, demand, collect, receive, receipt for, sue for, compound
                    and give
                    acquaintance for any and all amounts which may be or become due
                    and payable
                    under the Assigned Deposits; to execute any and all withdrawal
                    requests,
                    receipts or other orders for the payment of money drawn on the
                    Assigned Deposits
                    and to endorse the name of Bank on all instruments given in payment
                    or in
                    partial payment therefor. The foregoing power of attorney is
                    coupled with an
                    interest and shall be irrevocable until all of the Obligations
                    have been paid in
                    full. Neither Bank nor anyone acting on its behalf shall be liable
                    for acts,
                    omissions, errors in judgment, or mistakes in fact in such capacity
                    as
                    attorney-in-fact. Debtor ratifies all acts of Bank as attorney-in-fact.
                    Debtor
                    agrees to take such other actions, at Debtor’s expense, as might be requested
                    for the perfection, continuation and assignment, in whole or
                    in part, of the
                    security interests granted herein and to assure and preserve
                    Bank’s intended
                    priority position. If certificates, passbooks, or other documentation
                    or
                    evidence is/are issued or outstanding as to any of the Collateral,
                    Debtor will
                    cause the security interests of Bank to be property protected,
                    including
                    perfection by notation thereon or delivery thereof to Bank.
  **LANDLORD/MORTGAGEE
                    WAIVERS.** Debtor shall cause each mortgagee of real property owned by Debtor
                    and each
                    landlord of real property leased by Debtor to execute and deliver
                    instruments
                    satisfactory in form and substance to Bank by which such mortgagee
                    or landlord
                    subordinates its rights, if any, in the Collateral.
  **INSTRUMENTS,
                    CHATTEL PAPER, DOCUMENTS.** Any Collateral that is, or is evidenced by, instruments, chattel
                    paper or
                    negotiable documents will be property assigned to and the originals
                    of any such
                    Collateral in tangible form deposited with and held by Bank,
                    unless Bank shall
                    hereafter otherwise direct or consent in writing. Bank may, without
                    notice,
                    before or after maturity of the Obligations, exercise any or
                    all rights of
                    collection, conversion, or exchange and other similar rights,
                    privileges and
                    options pertaining to such Collateral, but shall have no duty
                    to do
                    so.
 Page
                                    3
  **WITHDRAWAL
                                  OF ASSIGNED DEPOSITS.** Debtor
                                  shall not be permitted to withdraw funds from or
                                  exercise any authority of any
                                  kind with respect to the Assigned Deposits specifically
                                  identified above by
                                  account number. Bank shall have the exclusive authority
                                  to withdraw, or direct
                                  the withdrawal of, funds from said specifically
                                  identified Assigned Deposits. So
                                  long as this Agreement remains in effect, the Assigned
                                  Deposits will be titled
                                  as directed by Bank.
  **COLLATERAL
                                  DUTIES.** Bank
                                  shall have no custodial or ministerial duties to
                                  perform with respect to
                                  Collateral pledged except as set forth herein;
                                  and by way of explanation and not
                                  by way of limitation, Bank shall incur no liability
                                  for any of the following:
                                  (i) less or depreciation of Collateral (unless
                                  caused by its willful misconduct
                                  or gross negligence), (ii) failure to present any
                                  paper for payment or protest,
                                  to protest or give notice of nonpayment, or any
                                  other notice with respect to any
                                  paper or Collateral. Bank’s sole duty with respect to the custody, safekeeping
                                  and physical preservation of any certificate, passbook,
                                  or other documentation
                                  evidencing the Assigned Deposits in its possession
                                  shall be to deal with it in
                                  the same manner as it deals with similar property
                                  for its own account. Neither
                                  Bank, nor any of its employees or agents shall
                                  be liable for failure to demand,
                                  collect, or realize upon any of the Assigned Deposits
                                  or for any delay in doing
                                  so.
  **TRANSFER
                                  OF COLLATERAL.** Bank may
                                  assign its rights in Collateral or any part thereof
                                  to any assignee who shall
                                  thereupon become vested with all the powers and
                                  rights herein given to Bank with
                                  respect to the property so transferred and delivered,
                                  and Bank shall thereafter
                                  be forever relieved and fully discharged from any
                                  liability with respect to such
                                  property so transferred, but with respect to any
                                  property not so transferred,
                                  Bank shall retain all rights and powers hereby
                                  given.
  **INSPECTION,
                                  BOOKS AND RECORDS.** Debtor
                                  will at all times keep accurate and complete records
                                  covering each item of
                                  Collateral, including the proceeds therefrom. Bank,
                                  or any of its agents, shall
                                  have the right, at intervals to be determined by
                                  Bank and without hindrance or
                                  delay, at Debtor’s expense, to inspect, audit, and examine the Collateral
                                  during
                                  normal business hours and to make copies of and
                                  extracts from the books,
                                  records, journals, orders, receipts, correspondence
                                  and other data relating to
                                  Collateral, Debtor’s business or any other transaction between the
                                  parties
                                  hereto. Debtor will at its expense furnish Bank
                                  copies thereof upon request. For
                                  the further security of Bank, it is agreed that
                                  Bank has and is hereby granted a
                                  security interest in all books and records of Debtor
                                  pertaining to the
                                  Collateral.
  **COMPLIANCE
                                  WITH LAW.** Debtor
                                  will comply with all federal, state and local laws
                                  and regulations, applicable
                                  to it, including without limitation, laws and regulations
                                  relating to the
                                  environment, labor or economic sanctions, in the
                                  creation, use, operation,
                                  manufacture and storage of the Collateral and the
                                  conduct of its
                                  business.
  **REGULATION
                                  U.** None of
                                  the proceeds of the credit secured hereby shall
                                  be used directly or indirectly
                                  for the purpose of purchasing or carrying any margin
                                  stock in violation of any
                                  of the provisions of Regulation U of the Board
                                  of Governors of the Federal
                                  Reserve System (“Regulation U”), or for the purpose of reducing or retiring any
                                  indebtedness which was originally incurred to purchase
                                  or carry margin stock or
                                  for any other purchase which might render the Loan
                                  a “Purpose Credit” within the
                                  meaning of Regulation U.
  **CROSS
                                  COLLATERALIZATION LIMITATION.** As to
                                  any other existing or future consumer purpose loan
                                  made by Bank to Debtor,
                                  within the meaning of the Federal Consumer Credit
                                  Protection Act, Bank expressly
                                  waives any security interest granted herein in
                                  Collateral that Debtor uses as a
                                  principal dwelling and household goods.
  **ATTORNEYS’
                                  FEES AND OTHER COSTS OF COLLECTION.** Debtor
                                  shall pay all of Bank’s reasonable expenses actually incurred in enforcing
                                  this
                                  Security Agreement and in preserving and liquidating
                                  Collateral, including but
                                  not limited to, reasonable arbitration, paralegals’ attorneys’ and experts’ fees
                                  and expenses, whether incurred with or without
                                  the commencement of a suit,
                                  trial, arbitration, or administrative proceeding,
                                  or in any appellate or
                                  bankruptcy proceeding
  Page
                                                  4
  **DEFAULT.** If any
                                                of the following occurs, a default
                                                (“Default”) under this Security Agreement
                                                shall exist: Loan
                                                Document Default. A
                                                default under any Loan Document. Collateral
                                                Loss or Destruction. Any
                                                loss, theft, substantial damage,
                                                or destruction of Collateral not
                                                fully covered
                                                by insurance, or as to which insurance
                                                proceeds are not remitted to Bank
                                                within
                                                30 days of the loss. Collateral
                                                Sale, Lease or Encumbrance. Any
                                                sale, lease, or encumbrance of any
                                                Collateral not specifically permitted
                                                herein
                                                without prior written consent of
                                                Bank. Levy,
                                                Seizure or Attachment. The
                                                making of any levy, seizure, or attachment
                                                on or of Collateral which is not
                                                removed within 10 days. Unauthorized
                                                Collection of Collateral. Any
                                                attempt to collect, cash in or otherwise
                                                recover deposits that are Collateral. Unauthorized
                                                Termination. Any
                                                attempt to terminate, revoke, rescind,
                                                modify, or violate the terms of this
                                                Security Agreement without the prior
                                                written consent of Bank.
  **REMEDIES
                                                ON DEFAULT (INCLUDING POWER OF SALE).** If
                                                a Default occurs Bank shall have
                                                all the rights and remedies of a
                                                secured party
                                                under the Uniform Commercial Code.
                                                Without limitation thereto, Bank
                                                shall have
                                                the following rights and remedies:
                                                (i) to take immediate possession
                                                of
                                                Collateral, without notice or resort
                                                to legal process, and for such purpose,
                                                to
                                                enter upon any premises on which
                                                Collateral or any part thereof may
                                                be situated
                                                and to remove the same therefrom,
                                                or, at its option, to render Collateral
                                                unusable or dispose of said Collateral
                                                on Debtor’s premises; (ii) to require
                                                Debtor to assemble the Collateral
                                                and make it available to Bank at
                                                a place to be
                                                designated by Bank; (iii) to exercise
                                                its or its affiliate’s right of set-off or
                                                Bank lien as to any monies of Debtor
                                                deposited in deposit accounts and
                                                investment accounts of any nature
                                                maintained by Debtor with Bank or
                                                affiliates
                                                of Bank, without advance notice,
                                                regardless of whether such accounts
                                                are general
                                                or special; (iv) to dispose of Collateral,
                                                as a unit or in parcels, separately
                                                or with any real property interests
                                                also securing the Obligations, in
                                                any county
                                                or place to be selected by Bank,
                                                at either private or public sale
                                                (at which
                                                public sale Bank may be the purchaser)
                                                with or without having the Collateral
                                                physically present at said sale;
                                                (v) to apply toward and set-off against
                                                and
                                                apply to the then unpaid balance
                                                of the Obligations the Assigned Deposits
                                                (accelerated to maturity if necessary),
                                                even if effecting such set-off results
                                                in a loss or reduction of interest
                                                or the imposition of a penalty applicable
                                                to
                                                the early withdrawal of time deposits:
                                                (vi) to receive any interest or payments
                                                in respect of the Assigned Deposits
                                                and apply such amounts and the Assigned
                                                Deposits to the Obligations in such
                                                manner as Bank, in its sole discretion,
                                                may
                                                determine.
  Any
                                                notice of sale, disposition or other
                                                action by Bank required by law and
                                                sent to
                                                Debtor at Debtor’s address shown above, or at such
                                                other address of Debtor as
                                                may from time to time be shown on
                                                the records of Bank, at least 5 days
                                                prior to
                                                such action, shall constitute reasonable
                                                notice to Debtor. Notice shall be
                                                deemed given or sent when mailed
                                                postage prepaid to Debtor’s address as provided
                                                herein. Bank shall be entitled to
                                                apply the proceeds of any sale or
                                                other
                                                disposition of the Collateral, and
                                                the payments received by Bank with
                                                respect to
                                                any of the Collateral, to Obligations
                                                in such order and manner as Bank
                                                may
                                                determine. Collateral that is subject
                                                to rapid declines in value and is
                                                customarily sold in recognized markets
                                                may be disposed of by Bank in a
                                                recognized market for such collateral
                                                without providing notice of sale.
                                                Debtor
                                                waives any and all requirements that
                                                the Bank sell or dispose of all or
                                                any part
                                                of the Collateral at any particular
                                                time, regardless of whether Debtor
                                                has
                                                requested such sale or disposition.
  **REMEDIES
                                                ARE CUMULATIVE.** No
                                                failure on the part of Bank to exercise,
                                                and no delay in exercising, any right,
                                                power or remedy hereunder shall operate
                                                as a waiver thereof, nor shall any
                                                single or partial exercise by Bank
                                                or any right, power or remedy hereunder
                                                preclude any other or further exercise
                                                thereof or the exercise of any right,
                                                power or remedy. The remedies herein
                                                provided are cumulative and are not
                                                exclusive of any remedies provided
                                                by law, in equity, or in other Loan
                                                Documents.
  Page
                                                                  5
 **INDEMNIFICATION.**Debtor shall protect,
                                                                indemnify and save
                                                                harmless Bank from
                                                                and against all
                                                                losses, liabilities,
                                                                obligations, claims,
                                                                damages, penalties,
                                                                fines, causes of
                                                                action, costs and
                                                                expenses (including,
                                                                without limitation,
                                                                reasonable attorneys’
fees and expenses)
                                                                (collectively, “Damages”) imposed upon, incurred
                                                                by or
                                                                asserted or assessed
                                                                against Bank on account
                                                                of or in connection
                                                                with (i) the
                                                                Loan Documents or
                                                                any failure or alleged
                                                                failure of Debtor
                                                                to comply with any
                                                                of
                                                                the terms of, or
                                                                the inaccuracy or
                                                                breach of any representation
                                                                in, the Loan
                                                                Documents, (ii) the
                                                                Collateral or any
                                                                claim of loss or
                                                                damage to the Collateral
                                                                or any injury or
                                                                claim of injury to,
                                                                or death of, any
                                                                person or property
                                                                that
                                                                may be occasioned
                                                                by any cause whatsoever
                                                                pertaining to the
                                                                Collateral or the
                                                                use, occupancy or
                                                                operation thereof,
                                                                (iii) any failure
                                                                or alleged failure
                                                                of Debtor to comply
                                                                with
                                                                any law, rule or
                                                                regulation applicable
                                                                to it or to the Collateral
                                                                or the use,
                                                                occupancy or operation
                                                                of the Collateral
                                                                (including, without
                                                                limitation, the
                                                                failure to pay any
                                                                taxes, fees or other
                                                                charges), (iv) any
                                                                Damages whatsoever
                                                                by
                                                                reason of any alleged
                                                                action, obligation
                                                                or undertaking of
                                                                Bank relating in
                                                                any
                                                                way to or any matter
                                                                contemplated by the
                                                                Loan Documents, or
                                                                (v) any claim for
                                                                brokerage fees or
                                                                such other commissions
                                                                relating to the Collateral
                                                                or any other
                                                                Obligations; provided
                                                                that such indemnity
                                                                shall be effective
                                                                only to the extent
                                                                of any Damages that
                                                                may be sustained
                                                                by Bank in excess
                                                                of any net proceeds
                                                                received by it from
                                                                any insurance of
                                                                Debtor (other than
                                                                self-insurance) with
                                                                respect to such Damages.
                                                                Nothing contained
                                                                herein shall require
                                                                Debtor to
                                                                indemnify Bank for
                                                                any Damages resulting
                                                                from Bank’s gross negligence
                                                                or its
                                                                willful misconduct.
                                                                The indemnity provided
                                                                for herein shall
                                                                survive payment of
                                                                the Obligations and
                                                                shall extend to the
                                                                officers, directors,
                                                                employees and duly
                                                                authorized agents
                                                                of Bank. In the event
                                                                Bank incurs any Damages
                                                                arising out of
                                                                or in any way relating
                                                                to the transaction
                                                                contemplated by the
                                                                Loan Documents
                                                                (including any of
                                                                the matters referred
                                                                to in this section),
                                                                the amounts of such
                                                                Damages shall be
                                                                added to the Obligations,
                                                                shall bear interest,
                                                                to the extent
                                                                permitted by law,
                                                                at the interest rate
                                                                borne by the Obligations
                                                                from the date
                                                                incurred until paid
                                                                and shall be payable
                                                                on demand.
  **MISCELLANEOUS.** (i) Amendments
                                                                and Waivers. No
                                                                waiver, amendment
                                                                or modification of
                                                                any provision of
                                                                this Security Agreement
                                                                shall be valid unless
                                                                in writing and signed
                                                                by Debtor and an
                                                                officer of Bank.
                                                                No
                                                                waiver by Bank of
                                                                any Default shall
                                                                operate as a waiver
                                                                of any other Default
                                                                or
                                                                of the same Default
                                                                on a future occasion.
                                                                (ii) Assignment. All
                                                                rights of Bank hereunder
                                                                are freely assignable,
                                                                in whole or in part,
                                                                and shall
                                                                inure to the benefit
                                                                of and be enforceable
                                                                by Bank, its successors,
                                                                assigns and
                                                                affiliates. Debtor
                                                                shall not assign
                                                                its rights and interest
                                                                hereunder without
                                                                the prior written
                                                                consent of Bank,
                                                                and any attempt by
                                                                Debtor to assign
                                                                without
                                                                Bank’s prior written consent
                                                                is null and void.
                                                                Any assignment shall
                                                                not release
                                                                Debtor from the Obligations.
                                                                This Security Agreement
                                                                shall be binding
                                                                upon
                                                                Debtor, and the heirs,
                                                                personal representatives,
                                                                successors, and assigns
                                                                of
                                                                Debtor. (iii) Applicable
                                                                Law;  Conflict
                                                                Between Documents. This
                                                                Security Agreement
                                                                shall be governed
                                                                by and construed
                                                                under the law of
                                                                the
                                                                jurisdiction named
                                                                in the address of
                                                                the Bank shown on
                                                                the first page hereof
                                                                (the “Jurisdiction”) without regard
                                                                to that Jurisdiction’s conflict of laws
                                                                principles, except
                                                                to the extent that
                                                                the UCC requires
                                                                the application of
                                                                the
                                                                law of a different
                                                                jurisdiction. If
                                                                any terms of this
                                                                Security Agreement
                                                                conflict with the
                                                                terms of any commitment
                                                                letter or loan proposal,
                                                                the terms of
                                                                this Security Agreement
                                                                shall control. (iv) Jurisdiction. Debtor
                                                                irrevocably agrees
                                                                to non-exclusive
                                                                personal jurisdiction
                                                                in the state
                                                                identified as the
                                                                Jurisdiction above.
                                                                (v) Severability. If any
                                                                provision of this
                                                                Security Agreement
                                                                shall be prohibited
                                                                by or invalid under
                                                                applicable law, such
                                                                provision shall be
                                                                ineffective but only
                                                                to the extent of
                                                                such prohibition
                                                                or invalidity, without
                                                                invalidating the
                                                                remainder of such
                                                                provision or the
                                                                remaining provisions
                                                                of this Security
                                                                Agreement. (vi) Notices. Any
                                                                notices to Debtor
                                                                shall be sufficiently
                                                                given, if in writing
                                                                and mailed of
                                                                delivered to the
                                                                address of Debtor
                                                                shown above or such
                                                                other address as
                                                                provided
                                                                hereunder; and to
                                                                Bank, if in writing
                                                                and mailed or delivered
                                                                to Wachovia Bank,
                                                                National Association,
                                                                Mail Code VA7628,
                                                                P. O. Box 13327,
                                                                Roanoke, VA 24040
                                                                or
                                                                Wachovia Bank, National
                                                                Association, Mail
                                                                Code VA7628, 10 South
                                                                Jefferson
                                                                Street, Roanoke,
                                                                VA 24011 or such
                                                                other address as
                                                                Bank may specify
                                                                in writing
                                                                from time to time.
                                                                Notices to Bank must
                                                                include the mail
                                                                code. In the event
                                                                that
                                                                Debtor changes Debtor’s mailing address
                                                                at any time prior
                                                                to the date the
                                                                Obligations are paid
                                                                in full, Debtor agrees
                                                                to promptly give
                                                                written notice of
                                                                said change of address
                                                                by registered or
                                                                certified mail, return
                                                                receipt
                                                                requested, all charges
                                                                prepaid. (vii) Captions. The
                                                                captions contained
                                                                herein are inserted
                                                                for convenience only
                                                                and shall not affect
                                                                the meaning or interpretation
                                                                of this Security
                                                                Agreement or any
                                                                provision
                                                                hereof. The use of
                                                                the plural shall
                                                                also mean the singular,
                                                                and vice versa.
                                                                (viii) Joint
                                                                and
                                                                Several Liability. If more
                                                                than one party has
                                                                signed this Security
                                                                Agreement, such parties
                                                                are jointly and
                                                                severally obligated
                                                                hereunder. (ix) Binding
                                                                Contract. Debtor
                                                                by execution and
                                                                Bank by acceptance
                                                                of this Security
                                                                Agreement, agree
                                                                that each
                                                                party is bound by
                                                                all terms and provisions
                                                                of this Security
                                                                Agreement. (xii) Final
                                                                Agreement. This
                                                                Agreement and the
                                                                other Loan Documents
                                                                represent the final
                                                                agreement between
                                                                the
                                                                parties and may not
                                                                be contradicted by
                                                                evidence of prior,
                                                                contemporaneous or
                                                                subsequent oral agreements
                                                                of the parties. There
                                                                are no unwritten
                                                                oral
                                                                agreements between
                                                                the parties.
  Page
                                                                                    6
 **DEFINITIONS.**
                                                                                    Loan
                                                                                    Documents.The
                                                                                    term
                                                                                    “Loan
                                                                                    Documents”
refers
                                                                                    to
                                                                                    all
                                                                                    documents,
                                                                                    including
                                                                                    this
                                                                                    Agreement,
                                                                                    whether
                                                                                    now
                                                                                    or
                                                                                    hereafter
                                                                                    existing,
                                                                                    executed
                                                                                    in
                                                                                    connection
                                                                                    with
                                                                                    or
                                                                                    related
                                                                                    to
                                                                                    the
                                                                                    Obligations, and
                                                                                    may
                                                                                    include,
                                                                                    without
                                                                                    limitation
                                                                                    and
                                                                                    whether
                                                                                    executed
                                                                                    by
                                                                                    Debtor
                                                                                    or
                                                                                    others,
                                                                                    commitment
                                                                                    letters
                                                                                    that
                                                                                    survive
                                                                                    closing,
                                                                                    loan
                                                                                    agreements,
                                                                                    promissory
                                                                                    notes,
                                                                                    guaranty
                                                                                    agreements,
                                                                                    deposit
                                                                                    or
                                                                                    other
                                                                                    similar
                                                                                    agreements,
                                                                                    other
                                                                                    security
                                                                                    agreements,
                                                                                    letters
                                                                                    of
                                                                                    credit
                                                                                    and
                                                                                    applications
                                                                                    for
                                                                                    letters
                                                                                    of
                                                                                    credit,
                                                                                    security
                                                                                    instruments,
                                                                                    financing
                                                                                    statements,
                                                                                    mortgage
                                                                                    instruments,
                                                                                    any
                                                                                    renewals
                                                                                    or
                                                                                    modifications,
                                                                                    whenever
                                                                                    any
                                                                                    of
                                                                                    the
                                                                                    foregoing
                                                                                    are
                                                                                    executed,
                                                                                    but
                                                                                    does
                                                                                    not
                                                                                    include
                                                                                    swap
                                                                                    agreements
                                                                                    (as
                                                                                    defined
                                                                                    in
                                                                                    11
                                                                                    U.S.C.
§
101,
                                                                                    as
                                                                                    in
                                                                                    effect
                                                                                    from
                                                                                    time
                                                                                    to
                                                                                    time),
                                                                                    UCC.
“UCC”
                                                                                    means
                                                                                    the
                                                                                    Uniform
                                                                                    Commercial
                                                                                    Code
                                                                                    as
                                                                                    presently
                                                                                    and
                                                                                    hereafter
                                                                                    enacted
                                                                                    in
                                                                                    the
                                                                                    jurisdiction.
                                                                                    Terms
                                                                                    defined
                                                                                    in
                                                                                    the
                                                                                    UCC.
                                                                                    Any
                                                                                    term
                                                                                    used
                                                                                    in
                                                                                    this
                                                                                    Agreement
                                                                                    and
                                                                                    in
                                                                                    any
                                                                                    financing
                                                                                    statement
                                                                                    filed
                                                                                    in
                                                                                    connection
                                                                                    herewith
                                                                                    which
                                                                                    is
                                                                                    defined
                                                                                    in
                                                                                    the
                                                                                    UCC
                                                                                    and
                                                                                    not
                                                                                    otherwise
                                                                                    defined
                                                                                    in
                                                                                    this
                                                                                    Agreement
                                                                                    or
                                                                                    any
                                                                                    other
                                                                                    Loan
                                                                                    Document
                                                                                    has
                                                                                    the
                                                                                    meaning
                                                                                    given
                                                                                    to
                                                                                    the
                                                                                    term
                                                                                    in
                                                                                    the
                                                                                    UCC.
  **IN
                                                                                    WITNESS
                                                                                    WHEREOF,** Debtor,
                                                                                    on
                                                                                    the
                                                                                    day
                                                                                    and
                                                                                    year
                                                                                    first
                                                                                    written
                                                                                    above,
                                                                                    has
                                                                                    caused
                                                                                    this
                                                                                    Security
                                                                                    Agreement
                                                                                    to
                                                                                    be
                                                                                    duly
                                                                                    executed
                                                                                    under
                                                                                    seal.
  Smart
                                                                                              Online,
                                                                                              Inc.By:
                                                                                          /s/ 
Nicholas
                                                                                            A.
                                                                                            Sinigaglia                                               (SEAL)Nicholas
                                                                                              A.
                                                                                              Sinigaglia,
                                                                                              Chief
                                                                                              Financial
                                                                                              Officer
  Page
                                                                                                          7